6 Ways Dividends Are Important.

Dividends are an important part of investing – especially if you are an income or value investor. Investing for income is all about dividend yield, but dividends have many other virtues – even if generating income from your investments isn’t of paramount concern.

  1. Dividends are a large part of a stock’s overall return. In fact, dividends account for about 43% of the S&P 500’s average annualized return of 10%.
  2. Dividends are more predictable than a company’s growth and earnings rate and certainly more predictable than a stock’s price.
  3. Dividends grow over time, unlike the yield of most bonds which is fixed. Many companies also tend to boost their dividend payments over time. Standard & Poor’s keeps a list of blue chip companies that have increased dividends every year for at least the last 25 consecutive years, called the S&P 500 Dividend Aristocrats.
  4. Dividends are taxed at a maximum rate of 15% – regardless of income tax rate. That is, until the Bush tax cuts expire at the start of 2011. After that, they will be taxed as income – up to 39.6%.
  5. Dividend paying stocks (as a group) are less volatile than non-dividend paying stocks. In fact, the average volatility of a dividend stock is 50% less than non-dividend stocks.
  6. Dividend payers hold more of their value in stock market collapses. dividend paying stocks lost an average of 39% in the 2008 collapse, compared with 45.5% lost by non-dividend paying stocks. The contrast was even more stark in the tech bubble burst where dividend payers lost only 11%, compared to the 30% loss of non-dividend payers

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